What does Bitcoin mean for PayPal Stock?

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It is estimated that up to 200 million consumers worldwide have transacted with Bitcoin (CRYPTO: BTC) in one way or another. As Bitcoin and other digital coins become more popular alternatives to holding cash, it is imperative for PayPal Holdings (NASDAQ: PYPL) to offer its more than 400 million active customers a way to make deposits. transactions with Bitcoin, especially if it wants to keep up with the competition. .

In the first half of 2021, Square’s Cash app (NYSE: SQ) downloaded almost twice as fast as PayPal’s Venmo. Additionally, Square first offered its users the option to purchase Bitcoin four years ago.

Image source: Getty Images.

Towards the end of 2020, PayPal finally jumped aboard the crypto train and offered the ability to buy, sell, and hold cryptocurrencies, including Bitcoin, Ethereum, Litecoin, and Bitcoin Cash. He followed up on that decision by launching the crypto into the peer-to-peer payment app Venmo in April.

While crypto transactions probably don’t have as much of an impact on PayPal’s profitability, it’s clear that they significantly boost user engagement, which could drive the growing popularity of Bitcoin and other digital currencies. an important growth engine for PayPal.

PayPal users sign up with new crypto offering

PayPal has made major improvements to its applications this year. In addition to offering cryptocurrency, it recently revamped the PayPal app with new shopping features and announced other upcoming features including a savings account and other investing capabilities. It is clear that PayPal users are very interested in the possibility of buying crypto.

During the third quarter earnings call last month, management noted that new users trading with crypto in the PayPal app were up 15% compared to using the old app. In the second quarter, management reported “strong adoption and trade” of the cryptocurrency after it launched for Venmo users in April.

However, this is about as accurate as management got it with analysts when calling the results. Unlike Square, PayPal does not disclose specific revenue amounts from cryptocurrency transaction processing fees. Square said it generated $ 8 billion in revenue from processing Bitcoin transactions in the first nine months of 2021. But the costs of processing those transactions amounted to nearly $ 7.9 billion, leaving a very slim gross margin.

If PayPal’s gross margin on its own Bitcoin transactions is about the same as Square’s, then crypto doesn’t have much of an impact on its bottom line. PayPal was already a very profitable business before offering crypto, generating $ 4.2 billion in net profit out of $ 21 billion in total revenue in 2020.

Still, the availability of cryptocurrency on PayPal apps appears to be fueling a significant acceleration in the frequency with which customers open their apps, which is almost as important.

Crypto Brings Huge Benefits to User Engagement

The ability to buy Bitcoin through the PayPal and Venmo apps offers huge benefits in attracting new users and maintaining high engagement with customers. CEO Dan Schulman said earlier this year during the Q1 earnings call: “About half of our crypto users open their apps every day.”

We can see the engagement across the platform continue to progress. The average number of transactions per active account hit a new high of 44.2 per year, representing a 10% year-over-year increase in the third quarter. This essentially means that the average customer opens the app almost once a week, but the rate of increase has accelerated significantly over the past year. A year ago at this time, annual transactions per account grew only 1% year-on-year to 40.1.

Plus, all of the new features included in the revised PayPal app that launched in September are generating interest in other offers as well. In the third quarter earnings call, management noted that payment card registrations had increased 35% since the launch of the new app.

Overall, I wouldn’t expect cryptocurrency trading to dramatically increase PayPal’s revenue just yet, but just as importantly, it seems to boost engagement across the business. In this way, it can generate additional income and profit when users visit the features of the cryptocurrency, but end up engaging with other services instead.

PayPal shares fell in the wake of its third quarter earnings report as management’s short-term guidance failed to impress. But the acceleration in engagement following PayPal’s entry into the cryptocurrency world shows why the stock price will eventually rebound and why it’s still a great long-term investment.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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